Every transaction has a seller and buyer

Total expenditure = total income

Consider two cars manufactured by Chevrolet in

2007. During 2007, Chevrolet sells one of the two

cars to Sean for $24,000. Later in the same year,

Sean sells the car to Kati for $19,000. The second

automobile, with a market value of $30,000, is

unsold at the end of 2007 and it remains in

Chevrolet’s inventory. The transactions just

described contribute how much to GDP for 2007?

Y = C + I + G + NX

(C) consumption,

(I) investment,

(G) government purchases,

(NX) Net Exports

Nominal - uses current prices to value goods and services

Real - uses constant base year prcies to measure goods and services

GDP deflator = 100 * (nominal GDP / real GDP)

Measures the consumer's typical cost of living

o   CPI = 100 * (cost of basket in current year) / (cost of basket in base year)

Substitution bias

Introduction of new goods

Changes in the quality of goods and services

CPI overstates inflation

Imported consumer goods (i.e. foreign oil)

o   Included in CPI

o   Excluded from GDP Deflator

Capital Goods

o   Excluded from CPI

o   Included in GDP deflator (if produced domestically)

The basket

o   CPI uses fixed basket

o   GDP Deflator uses basket of currently produced goods & services

Amount in today’s dollar = (amount in T years) * (Price level today / Price level in T years)

The rate of growth in the dollar value of a deposit or debt

Not corrected for inflation

The rate of growth in the purchasing power of a deposit or debt

Corrected for inflation

The value of the consumer price index increased

from 140 to 147 during 2006. Nathan opened a

bank account at the beginning of 2006, and at the

end of 2006 his account balance was $12,840.

Assuming no other transactions during the year.

The purchasing power of Nathan’s account

increased by 2 percent during the year. How

much did Nathan deposit when he opened his

account.

Productivity determines the economy's ability to produce goods and services

Y = A F(L,K,H,N)

Y/L = A F(1,K/L,H/L,N/L)

institutions that match the saving of one person with the investment of another

Bond Market

Stock Market

institutions where savers can directly provide funds to borrowers

institutions where savers can indirectly provide funds to borrowers

Ex. Banks, Mutual Funds

Private Saving = Y – T – C

Public Saving = T – G

§  When Public Saving (T – G) is positive 

§  A shortfall of tax revenue from government spending

When public saving (T-G) is negative

Private saving + Public Saving

(Y – T – C) + (T – G)

 National saving = (Y – C – G)